Gold Recovers Overnight Dip as Euro Jumps on Rising Inflation; Subprime Home-Loan Bonds Downgraded

By: Adrian_Ash

SPOT GOLD PRICES recovered an overnight dip by lunchtime in London on Tuesday, trading above $795 per ounce as European stock markets stood 1% lower for the day.

US bond prices held near recent highs while the Euro rose on the currency markets, gaining almost one cent from last night's two-week lows to the Dollar.

The single European currency jumped to $1.4730 on news that Producer Price inflation in the Eurozone hit 3.3% per year in Oct. That was sharply above both Sept.'s reading of 2.7% as well as analysts' forecasts of 3.0%.

The currency move capped the Gold Price in Euros below €540 per ounce as crude oil prices fell by 1.1% ahead of tomorrow's meeting of the Opec oil cartel in Abu Dhabi .

"Opec will go ahead with a 500,000 barrel per day increase" in output, reckons Edward Meir at MF Global in Connecticut . "However, the decision will come down to the wire, and much will ride on where prices are."

More than half of the 42 oil analysts surveyed by Bloomberg News, however, believe Opec will delay raising output quotas now that prices have dropped almost 10% from last month's record peak near $100 per barrel.

Declassified analysis by the US National Intelligence Estimate claimed yesterday that Iran halted its nuclear weapons program in 2003, adding to the pressure on oil prices as traders cut its "war premium".

The Gold Market "seems to be trying to find support at $773" – last month's low – according to Robin Wilkin, head of technical analysis for J.P.Morgan's commodities & forex desk in London .

Looking at the Gold Price on February futures, "there are buy stops waiting at $807.00," says Christopher Langguth for Mitsui today, "and there are sell stops waiting at $780.00.

But for now, "the bull market has made no progress since 7 November. Those who close out their speculative positions are unlikely to return before January," Langguth believes.

Overnight in Tokyo the Nikkei stock index dropped almost 1% of its value as the Japanese Yen rose against the Dollar.

Down to ¥109.65, the greenback has already lost 1.2% vs. the Japanese currency so far this week. The rising Yen also pushed Gold Market futures traded at the Tocom for delivery in Oct. '08 down one-third of a per cent. The contract ended the session slightly higher in Dollar terms, however, at $801.60 per ounce.

"You've seen gold continue to track the US Dollar almost tit for tat for a good number of years, and certainly over the last week or so," reckons Wilkin at J.P.Morgan in London .

But with gold now 5% or more off its recent highs against all major currencies, retail sales may continue to pick up in the key Asian markets as jewelry buyers take advantage of this lull.

"Bits of buying are taking place," said one Indian gold dealer to Reuters in Rajkot today. "People are hoping that the Gold Price would fall to around 9,800 Rupees" per 10 grams – equal to $775 an ounce.

"At every dip, buyers are coming," said another dealer. "They are comfortable at prices below $800 an ounce."

Twelve months ago, the "comfort level" for Indian consumers Buying Gold was widely reported to sit below $600 per ounce, nearly 25% beneath today's prices.

Meantime in the bond market, US Treasury prices slipped as the New York opening drew near, pushing bond yields higher.

Treasuries with these yields are "not really attractive," notes Michael Markovic at Credit Suisse in Zurich . "We have to look at the fundamentals and these fundamentals indicate that this rally [in bond prices] has gone too far. This is putting a floor under how much further yields can fall."

US bond yields have collapsed since the start of June, taking the return offered to new buyers of two-year Treasuries down from 5.10% to just 2.86% last night.

Two-year US bond yields this morning ticked up 2.89%, but they remain well below consumer price inflation – last reported, officially, at 3.54%.

"As long as we can find fresh bad news on credit, which doesn't seem to be difficult at the moment, it's hard to see yields rising much above these levels," counters Marc Ostwald at Insinger de Beaufort in London – and despite the ever-growing inflation reported in Europe, two-year German bund yields slipped this morning to 3.75%, down 10 basis points from the week's opening on Monday.

Today's early news from the credit market, meantime, included Moody's – the global ratings agency – downgrading 43 tranches of subprime-mortgage backed bonds issued by Merrill Lynch, adding that the collateral underpinning these bonds is "experiencing higher than anticipated rates of delinquency, foreclosure."

A Bloomberg report also claimed that Florida 's state pension fund is holding "more than $1 billion of the same downgraded and defaulted debt that sparked a run on a state investment pool for local governments and forced officials to freeze withdrawals."

Education authorities and local town councils are currently locked out of $14 billion frozen by the Local Government Investment Pool. "A state-created home insurer and the treasury are also at risk," Bloomberg adds.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2007

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